Mexico 2018 | ENERGY & MINING | REVIEW

A spate of major discoveries by foreign firms in July 2017 more than vindicated the government's major privatization reforms first put in place in 2013.

Huge offshore discoveries made in 2017 and looming concerns over whether or not major privatization reforms made to Mexico's hydrocarbons industry since 2013 will be respected after Peña Nieto leaves office have placed the country's energy sector at its biggest crossroads in a generation. With state-run Pemex production at its lowest in four decades, but oil creeping back up above USD70/barrel, the opportunities for shaking up the country's energy sector are more than ripe, and hardly going unnoticed. That is why many both within and without the country have sought to establish one too many “facts on the ground" before Peña Nieto's presidency ends in December. But will these bold moves hold firm under his successor?

For three quarters of a century, Mexico's energy sector was off-limits to foreign exploration and development. After allowing foreign outfits to reenter in 2013, many are now calling July 2017 the single most momentous event in the Mexican industry since the fateful day President Cárdenas nationalized the industry in 1938 because of major offshore discoveries made by foreign firms, starting with a consortium led by Houston-based Talos, Mexico's Sierra Oil and Gas, and the UK's Premier Oil. Drilling in a block off the coast of Tabasco state, the Talos consortium estimates it found reserves of 1.2-2 billion barrels of oil, of which 500m are likely to be commercially viable. Given that Mexico's total 'proven and probable' reserves stand at 12.8 billion barrels, this first major discovery since the 2013 reforms is policy paying off in a big way. And that was not the only good news. The very day Talos made its discovery known, Italian producer Eni said it had struck new black gold at its shallow-water Amoca field in the bay of Campeche, which straddles the states of Campeche, Veracruz, and Tabasco, thus boosting that fields estimated reserves to 1.3 billion.
These are but two of the major foreign operations now underway in Mexico since the landmark 2013 ruling, though more than 60 foreign firms are now committed to the Mexican oil and gas sector that were not previously. If 2017 was a landmark year for important new discoveries, 2018 has been just as important to drumming up the foreign investment needed to ensure such discoveries continue unabated. In one round of bidding alone in January, Mexico's oil sector won USD93 billion in promises. Awarding 19 out of 29 bids to firms from the US, UK, Japan, Malaysia, Thailand, Qatar, Spain, and Italy, among others, Juan Carlos Zepeda, head of Mexico's National Hydrocarbons Commission, the sector's regulator, estimates these could increase national oil output from 1.9 million barrels/day to 3.4, or 79%. January's bidders have also committed to drilling an additional 23 wells, bringing the total of newly operable ones since the 2013 reforms up to 129. With the biggest competition coming over fields in the Salinas basin, Zepeda also predicts the bids could increase natural gas production from 5 billion cubic feet/day to 9 billion, an uptick of 80%.

To be sure, these investments are contingent upon successful discoveries being made, which couldn't come sooner. Pemex has not made a deepwater discovery in two decades, according to oil analyst George Baker of Houston-based Baker and Associates, and output is at its lowest in decades, down from nearly 3 million barrels/day in 2008 to 1.9 million today. And while Pemex saw its first profitable quarters during the first three quarters of 2017, these came on the back of five consecutive years in the red from 2011-2016 and were followed by huge losses in 4Q2017 of USD18 billion, mostly because of the peso depreciating against the dollar by some 8%. Luckily, July 2017's discoveries are far from the only signs of optimism, for January's successful bidders were optimistic enough to shell out USD525 million in cash to Mexico City just to secure their blocks, which each come with 50-year lifespan awards. The largest such cash payout was made by a consortium of Spain's Repsol, Malaysia's Petronas, Mexico's Sierra Oil and Gas, and Thailand's PTT Exploration and Production.

To assuage its domestic critics, Mexico's National Hydrocarbons Commission says the government will take home between 63 and 67% of profits on the aforementioned discoveries, which is more than what Brasilia or Washington receive for deepwater blocks. Once again, this could not have come sooner. Though Pemex's tax bill shot up to USD5.18 billion in Q42017 from USD3.52 billion in Q2, an increase of 47%, Mexico's national oil company today covers less than a fifth of the federal budget compared to more than a third several years ago. While much of this can be blamed on the post-2014 collapse in oil prices, Pemex's failure to make new discoveries or fend off the American shale invasion also has much to do with this. In any case, one thing is clear: the Mexican government has been working at breakneck speed in the past 18 months to push through as many deals as possible before Peña Nieto's term concludes in December. With more than 100 under its belt, it has been more than a little successful. Though president elect Andrés Manuel López Obrador has promised to reverse many of his predecessor's energy policies, handing back USD525 million in much-needed cash is unlikely to be one of them.

Yet for all the bravado about a possible Mexican production renaissance, the country is still running a USD15 billion energy deficit vis-à-vis its northern neighbor, whose Texan and New Mexican producers will not be keen to see a lucrative client go. As part of a five-year plan put into effect in 2015 to use cleaner energy sources, Mexico has discarded coal and diesel for cleaner American shale-based natural gas, 4.5 billion cubic feet of which now flows into the country every day through 20 pipelines to produce 30% of Mexico's electricity. In total, Mexico purchased a million barrels of American petroleum products per day in 2017, worth USD23 billion and accounting for 8% of American crude exports. On an even more symbolic level, 2017 also saw the arrival of the first American gas retailers since the 1930s. Though France's Total and the Anglo-Dutch Shell beat them to it by several months, Dallas-based Exxon Mobil unveiled eight retail shops in December 2017 and promised to open another 50 by the end of 1Q2018.

What, then, will become of Obrador's energy policies once Peña Nieto steps aside in December? Though his rhetoric has softened in the past 12 months, Obrador is on record pledging to end energy exports, the vast majority of which go to the US, by 2022 and instead spend USD6 billion on two refineries capable of processing Mexican crude for the domestic market. Meanwhile his top energy advisor, Rocío Nahle, a chemical engineer and former legislator expected to become the next minister of energy, has called for a freeze on future deepwater drilling and a review of contracts with international oil companies. While it is unclear to what extent the more than 100 projects already signed or underway would be affected by such measures, Nahle reiterated in April to a group of a Mexican oil workers in Poca Roza that come “July 1, this town will end the looting of Mexico." Whether it is the wells or the people that will be looted will become clear in December.